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China Life Remains Neutral - Analyst Blog

We are maintaining our Neutral recommendation on
China Life Insurance Co. Ltd
(
LFC
) based on its extensive domestic distribution channel, strong
balance sheet, substantial cash flow and stable ratings. However,
the company is inherently exposed to substantial interest rate and
currency risks, which limit the upside. Moreover, despite a strong
brand name, significant competition on the domestic front hinders
earnings growth.

China Life posted earnings of RMB0.34 per share (81 cents per
ADR) in the first half of 2012, down 26.1% from RMB0.46 per share
(US$1.05 per ADR) in the first half of 2011.

China Life, which competes with
ING Group NV
(
ING
),
Manulife Financial Corporation
(
MFC
) and
Sun Life Financial Inc.
(
SLF
), has the most extensive distribution and service network among
all insurance companies operating in China. The company's
distribution network of exclusive agents, direct sales
representatives, bancasurrance outlets, customer service managers
and financial advisers is spread across the country, making it one
of the largest brands with one of the biggest customer bases in
China.

Moreover, China Life's cash flow from operating activities has
been growing substantially over the years. The proportion of cash
and cash equivalents in the investment portfolio increased to 5.32%
as of June 30, 2012, from 3.74% as of December 31, 2012. Higher
cash flows augment the cash balance of the company, thereby
strengthening its balance sheet and financial position.

However, China Life has been witnessing a gradual deterioration
in net premiums over the past few quarters. Net premiums earned
declined 5.2% year over year in the first half of 2012. Given that
premiums are the main source of business for an insurance company,
an increase in premium is essential for top-line growth in the long
run. Lower premiums can severely dent the operating strength of the
company.

Moreover, China Life faces intense competition from both
domestic as well as foreign companies. New entrants in the life
insurance market including pension companies as well as foreign
companies, with greater access to higher capital and better
technology than China Life, are putting substantial competitive
pressure on the company.China Life's results could be seriously
affected if it is unable to deal with the rising competition.

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